What are Trend Retracements?

Let’s take a look at what are trend retracements.

A retracement is defined as a temporary price movement against the established trend.

Another way to look at it is an area of price movement that moves against the trend but returns to continue the trend.

Easy enough? Let’s move on…

What are Trend Reversals?

We defined reversals as a change in the overall trend of price.

• When an uptrend switches to a downtrend, a reversal occurs.
• When a downtrend switches to an uptrend, a reversal also occurs.

Using the same example as above, here’s how a reversal looks like.

What Should You Do?

When faced with a possible retracement or reversal, you have three options:

1. If in a position you could hold onto your position. This could lead to losses if the retracement turns out to be a longer-term reversal.
2. You could close your position and re-enter if the price starts moving with the overall trend again. Of course, there could be a missed trade opportunity if the price sharply moves in one direction.  They also waste money on spreads if you decide to re-enter.
3. You could close permanently. This could result in a loss (if the price went against you) or a huge profit (if you closed at a top or bottom) depending on the structure of your trade and what happens after.

Because reversals can happen at any time, choosing the best option isn’t always easy.

This is why using trailing stop loss points can be a great risk management technique when trading with the trend.

You can employ it to protect your profits and make sure that you will always walk away with some pips in the event that a long-term reversal happens.

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